February 5, 2015
Ukraine's Economic Reform: Insights from the Newly Minted Minister of Finance
Ukraine's Economic Reform: Insights from the Newly Minted Minister of Finance
Minister of Finance,
Government of Ukraine
Welcome and Moderator:
President and CEO,
Time: 11:30 a.m. EDT
Date: Tuesday, February 3, 2015
Superior Transcriptions LLC
Ukraine's Economic Reform: Insights from the Newly Minted Minister of Finance
Minister of Finance,
Government of Ukraine
Welcome and Moderator:
President and CEO,
Time: 11:30 a.m. EDT
Date: Tuesday, February 3, 2015
Superior Transcriptions LLC
FREDRICK KEMPE: Thank you very much for that. As you heard, I'm Fred Kempe, president and CEO of the Atlantic Council. And I'm pleased to welcome you all to our call this morning. We have a very big turnout on the phone, a lot of people from the financial community, board members, media.
And it just shows the enormously high level of interest in hearing Ukraine's newly appointed Minister of Finance Natalie Jaresko. We're delighted that Minister Jaresko took the time from an incredibly busy schedule and an incredibly significant historic moment for her country to be on this call to discuss Ukraine's financial and economic challenges and the ongoing reform process.
These questions don't take place in a vacuum. As many of you know, we at the Atlantic Council released report yesterday with Brookings and the Chicago Council of Global Affairs called "Preserving Ukraine's Independence, Resisting Russian Aggression: What the United States and NATO Must Do." We called, in that report, for increased support, that the U.S. government should provide Ukraine $1 billion in military assistance as soon as possible in 2015, followed by additional tranches of $1 billion in fiscal year 2016, 2017. Minister Jaresko will be speaking not to the military issues in her country, but the very closely related and influenced economic and financial issues.
This call is on the record. We have members of the press on the call. Recordings of our calls can always be found on our website, AtlanticCouncil.org. And – if you miss them – and the – and the recording of this call will be posted immediately after we finish.
Many of you are already aware that the Atlantic Council has been active in supporting Ukraine's economic and democratic process. Under the leadership of Atlantic Council Executive Vice President Damon Wilson and the Patriciu Eurasia Center Director John Herbst, former ambassador to Ukraine, we launched this initiative last fall. It brings together policy leaders in Kiev, Washington and Europe to pursue policies that strengthen Ukraine's sovereignty and support the economic reform process.
President Poroshenko's government faces two primary challenges – many challenges, but two worth mentioning here at the outset: The war with Russia and the challenge of transformational economic reform, including issue regarding corruption. Today we focus in particular on the economic reform issues. IMF and the major Western countries public affirmed their willingness to provide a package for Ukraine's debt financing, but they've also pushed the Ukrainian government to institute comprehensive reform before additional funding is approved.
Two weeks ago at the meeting of the World Economic Forum in Davos, where – Minister Jaresko was there, I was there as well – IMF Chief Christine Lagarde expressed support for a Ukrainian aid package, but the amount under discussion still falls short of the $15 billion that's believed to be need to shore up the economy, hence the challenge we're gathered to talk about today. Minster Jaresko and the rest of the economic team and finance team that was at the World Economic Forum hugely impressed the business community and the policy community with whom they interacted.
So now let me just briefly introduce the minister and then we'll get started with an opening comment from her and a couple of questions from me, and then I'll go straight to the line after that.
President Poroshenko chose well when he asked Natalie Jaresko to be his new finance minister. A reform-minded financial professional, she served for five years as president and CEO of the Western NIS Enterprise Fund. After that, she founded Horizon Capital, where she served as CEO and managing partner. She graduated from DePaul University and holds a master's in public policy from Harvard's Kennedy School of Government.
We're very proud to have her on the line with us today. Madam Minister, and we hope to host you in Washington in the very near future. In December, Prime Minister Yatsenyuk submitted a reform budget that was approved by the Rada. We're eager to hear Minister Jaresko discuss how the budget will promote reform and what the international community can do to ensure – to help a successful reform process.
Minister Jaresko, very warm welcome. And I'm not sure on a telephone one says the floor is yours, so the virtual floor is yours.
MINISTER NATALIE JARESKO: Thank you very much. And my great thanks to the Atlantic Council for all the work that you're doing on Ukraine, in particular the report that came out yesterday. I didn't know about the event, but I've seen the report. And we would obviously be extraordinarily pleased if the U.S. Congress and the U.S. government followed your guidance. It would be very helpful.
And the reason, I go back to what you started with, is that you said we're facing two major challenges. And I would argue we're facing three major challenges, any one of which a government would find complex in and of itself. So one is indeed the war. The second is a recession. We've been in this recession for some nine quarters – since 2012. And then the third is the result of a post-revolutionary society and society's demanding legitimacy of its government and state institutions.
Our priorities right now currently are our national defense and our public legitimacy, as I said. And on national defense – to go further down the line – national defense requires a financial mobilization. We have included in our budget this year our highest level of spending in history for our defensive capacity. That's over 5 percent of our GDP. This financial mobilization you see through the budget process.
And there's basically – the primary area of our focus is broadening the tax base. We've just been through multiple quarters – nine quarters of recession. So there's no way to increase taxes on the existing small- or medium-sized business or individuals. The only way for us to increase our tax revenues to be able to afford this financial mobilization is to broaden the tax base.
We broad the tax base in three ways – first, through increasing the taxation of the wealthy, having them participate to a greater degree in that tax base; second, through eliminating loopholes and getting big business to pay its fair share; and then, third, by moving more of the shadow economy into the formal economy so that it's paying its fair share. Again, fairness, justice in the – in the taxation is a big part of this concept.
Besides that, our concept is that this year we stabilize our economy, stabilize our financial system and stabilize our banking system. And then we would move in a year – in some period of time toward growth, growth returning in the year hopefully 2016. Stabilization, for us, is really focused, on the public finance side, through reduction of government employees first and foremost. Last year, we had a 10 percent reduction. This year we see a – we've projected a 20 percent reduction in government employees.
Second is changing our social policy, moving away from the Soviet standards of categories of recipients and more towards a means-tested, a means-based system. Third is reform of our energy efficiency – everything from raising household – (inaudible) – to a more economically viable level, to the reform and restructuring of our state's oil and gas company on the basis of the third energy package. And lastly, state-owned enterprise reform, which we've already begun, which will hopefully eliminate more of the corruption and create more financial returns on the part of those enterprises that are state-owned today and enable us to privatize those that are privatizable in the near future. All of this is then to move toward growth, growth which requires us to begin the process right now of deregulation, of antitrust and of encouraging investment wherever we – is possible, through the DCFTA into the agriculture sectors, infrastructure, energy and the IT in particular.
I think that the best way for me to approach this is for one moment to back up and to tell you that the Ukrainian people today are paying the greatest cost for this war and for the aggression that's occurred on our territory. We're paying most importantly with human lives. Over 5,000 have been killed, 650,000 internally displaced people are registered in our system at the time and being supported by our social system. And I recently saw UNICEF reports that 1.7 million children have been affected by the war in the east and the illegal annexation of Crimea. The human cost alone is tremendous.
Aside from that, the war itself is costing us anywhere between 5 (million dollars) and $10 million per day. It's cost us 20 percent of our economy, some 7 percent of our territory at this point. So this cost – when we talk about burden sharing and we talk about the types of reports that you wrote and issued yesterday, it's very important to take into account that the greatest burden is being – is placed and lies on the shoulders of the Ukrainian people.
Yes, today we are asking for financial support in the form of the IMF and our bilateral and multilateral partners to help us through a very difficult time, but the fact of the matter is the great bulk of this crisis is borne on the shoulders of the Ukrainian nation. And so I don't want in any way for anyone to think that when we talk about additional financial support packages that the Ukrainian people are in any way trying to shirk their responsibility. In fact, they stand ready to take this responsibility every single day and night.
I guess with that – at this point, I'd love to just take questions so that I can – I can make my comments pertinent to your interests. If that's OK, Fred, I'd like to take the questions.
MR. KEMPE: That sounds terrific, Minister Jaresko. And at this time, we'll open the line. (Gives queuing instructions.)
So while people are queuing up, Minister Jaresko, let me – let me ask sort of two questions. First of all, I wonder if you could address the finance situation with the IMF. Where are you right now? What are your needs? How urgent and when is the timing situation – in other words, catch us up, if you can, on these negotiations, where we stand. And I actually will have one other question, but let me leave it at that for right now.
MIN. JARESKO: So we, as I said, are in talks right now. The IMF commission is here. We hope to complete these talks in the next days. What we are negotiating is an extended fund facility.
When we were in Davos last week and we met with Madam Lagarde, we asked for an extended fund facility on the basis of the fact that we recognize that, number one, the reforms that we have to undergo, given the state of the economy that we inherited from the previous regime and the combination of that together with the war, means that we have structural reforms that are very, very complex and will take some time.
We will not be able to fix the economy overnight or solve the problems of 23 – that haven't been resolved in 23 years overnight. We are committed to the medium term. And the extended fund facility both gives us access to additional support – financial support in the IMF, but it also commits us to a medium-term program – three, four years. We thought that this would be a very good sign to our partners that we are not in any way fooling ourselves as to the complexity of the demands that we're facing, and that we in no way are focusing on trying to make this some type of quick decision, quick deal.
In terms of the funding itself, of the IMF former standby programs, we received some 6 billion (dollars) out of the 18 billion (dollars). And the numbers changed because of the exchange rate with the – (inaudible) – but this in general. So we had about 12 billion (dollars) outstanding still under the old program. There have been a lot of newspaper articles estimating what the additional incremental need would be. And you've probably seen those reports in The Wall Street Journal and the Financial Times.
Those reports mention the number 15. I don't think that the number is the most critical. If it was in that range, of an additional incremental 15 – but I think the number is less important – whether it's 13 ½ or 14 or 15 ½ or 14 – then a few other things. Timing is important. Timing is important because we are in a critical situation from an economic standpoint, from a fiscal and financial standpoint.
Number two, the fact that – the amount should be substantial enough – so it does make a difference if it's too small – but I think whether or not it's 14 ½ or 15 ½ is not relevant. What's relevant is that it's substantial enough for us to be able to rebuild confidence in our domestic economy and in our banking system.
As you well know, most of these funds go towards one of two different priorities. One is for external payments that need to be made during the course of the year and the second is to rebuild the reserves in the Central Bank. So to the extent that that number is greater or smaller, it'll enable us to rebuild the reserves at a fast – quicker pace, to a larger base.
And the last part that's important about this financial package is that it be front-loaded. I've said this before. Again, if this money is dribbled out over, you know, 12 or 15 months, it will not have the effect of increasing confidence substantially in our banking system. So a front-loading of what ever sum is available at the time that we – that we reach this agreement is critical to getting us off to a good start.
Again, I think the number becomes even less important when you look at the fact that we're now in a medium-term program. Nobody should be worried about what happens after a 12-month standby, because we're not in a 12-month standby. We're in a medium-term or longer-term partnership with the IMF, which means that where the reserve level is on December 31st, 2015 is less important than in general where we are in our program and where we are in the support of our – of our partners.
MR. KEMPE: Thank you, Minister Jaresko. One more question right now from me, and then I'll – I see some questions coming in already. So let me turn to them after that.
The corrosiveness of corruption, of course, has been a very big issue in Ukraine. Some observers in Davos were expressing concern that that hasn't changed that much yet, the prevalence of oligarchic interests and the old ways of doing business have remained unchanged, and they're slowing down reform. Could you address that, and the measures you're taking to break that pattern, with as much specificity as you can?
MIN. JARESKO: Sure, I'd be happy to.
There's no question, and I mentioned it very upfront, that our anticorruption efforts are absolutely critical. They're critical to the legitimacy of the state. They're critical to the legitimacy of our reform effort. And they're critical to making those changes – those structural changes that we need in the economy. So it's been an absolute priority of the government, although it isn't something that happens overnight. There's no question it's a long process.
First and foremost, I guess I'd like to say that there are examples of our already, you know, having taken very concrete measures to eliminate corruption. For example, last year we eliminated all of the intermediaries in the purchase of gas via state – Naftohaz, our state oil and gas company. We no longer have intermediaries that in the previous 23 years have been accused of stealing hundreds of millions of dollars. We do not have them in our import of gas from Russia, nor in our import of gas from a variety of European suppliers on the reverse gas. That's just one example of a very specific thing that's already been done to eliminate corruption.
Aside from something very specific like that, we've tried to establish two different bases for the elimination of corruption going forward. One is the establishment of an anticorruption bureau, which is essence a special law enforcement agency with special powers to prosecute and special powers to investigate corruption in the country. We fully funded this anticorruption bureau in the 2015 budget, despite the fact that it was at Western salary levels, which was a very criticized thing by many in parliament and in the press.
We are right now in the process of a very transparent nomination and recruiting effort to find a credible CEO for this agency – excuse me, for this bureau. And it's my understanding that the nomination period will end on the 10th of February, so in a few days. And hopefully by the end of the month we'll have – we'll have – we'll be hearing the name of a person who will lead this agency – this bureau. I keep saying agency by accident.
And the reason I keep clarifying is because we've also established an anticorruption agency. The agency, unlike the bureau, is meant to have a preventative effect. It's meant to develop those policies which, going forward, will eliminate corruption from everyday policies and government structures. So these two entities, fully funded in the budget and fully operational within the first half of this year, will I think change the nature of the discussion.
But I'd like to go back for a moment to very specific things. One that I'm proud that we established in the budget process in December is the new electronic VAT, or value-added tax system. Why is an electronic VAT system helpful in anticorruption? Well, two areas. One is that Ukraine has been criticized for decades about its approach to refunding VAT, whether or not that refund process is transparent, who receives it first, second, who receives it in full, who receives it not at all. This electronic filing system will eliminate that and provide for a transparent refund system.
In addition, we were not – we were unlucky in the previous regime that a system of tax fraud had been developed where something – not unlike what happens in several European countries with the value-added tax – a companies files an invoice for VAT. Another company brings the invoice – you know, purchases goods and services, files for a refund. And before the tax authorities can figure it out, they've refunded the VAT to the second company and the first company, which never received payment and never paid the VAT, is already bankrupted.
This tax fraud is estimated to have been at its pinnacle some $1 billion per yet. So again, this electronic filing eliminates that. Of course, there is probably a lot of corruption involved with kickbacks in that type of tax fraud as well. So the electronic VAT system, which started on Monday of this week on a test regime, will best intended to eliminate that type of corruption in the tax system.
We've done a couple other things. We've established a business ombudsman with the support of the EBRD. This business ombudsman, who's a Lithuanian national, will be in essence a clear, independent source of information for all of us, including the anticorruption bureau but not only, on any reports of corruption by the business community. Call it a whistleblower opportunity, call it a direct channel to report on any kind of irregular activity. But the establishment of this ombudsman was very, very important for the business community. And he is in Kiev. And he's begun his work already.
For the average Ukrainian citizen, bureaus, laws, changes in ombudsman is not enough. And you can well imagine, something that's really critical to the average citizen is that he feel a decrease of corruption in his everyday life. The best thing we've done in this respect, the first thing we've done this year, is in our Ministry of Internal Affairs, we've started a complete reform of our militia into a normal traffic police. We have a pilot program which has begun already in Kiev as a start. But we will be switching over by the first half of this year to an entirely new traffic police with entirely new sets of people.
First of all, we're in the process right now of accepting applications, with the requirement of higher education, requirement of transparency in terms of financial background and much better training. It's very exciting for us that this effort's being led by our new deputy minister, who's a former Georgian national and who in fact made this reform real in Georgia and has experience and is not, you know, reinventing the bicycle. She's done it once before successfully.
This would be something that every average citizen in Kiev would be able to feel on their – in their everyday lives. Instead of police, you know, pulling them over and having their hands out, we would have a professional traffic police rather than the previous militia. This system is to be rolled out, hopefully on the basis of this pilot project, to at least three or four other cities of a million population this year.
This is just a number of the things that I'm giving as examples. There are actually additional. So the battle has begun. It will take time. But we are making every effort. I think the last thing I'll mention is the judicial – in the judicial area, because none of this works without the proper court reform. And the presidential administration in early January submitted legislation for court reform, for judicial reform. The Venice Commission is here right now reviewing it. This court reform is everything we could do prior to constitutional reform to enable us to have better and more efficient access on the part of individuals and business to our court system, higher qualified judges and more responsible judges, again, with more financial transparency.
The final thing that I'll note is that the president has submitted – and I think it's a historic moment – legislation to the parliament to eliminate the immunity of deputies and the – and to reduce the immunity of judges. When and if this legislation passes, I think it's a wholesale change in the nature of corruption and transparency in Ukraine.
MR. KEMPE: All right. Thank you. Thank you very much, Minister Jaresko. I think it's very helpful to have that additional detail.
Let me turn to Andrew Mayeda of Bloomberg News, please.
Q: Hi, Minister. Thanks for taking my question.
I just – I've got two questions. First of all, I just wanted to clarify. On the issue of financing you were mentioning a lot of different numbers, but I want to be absolutely clear. Setting aside the existing program, the one – the existing IMF program, the one that was announced in April, how much financing do you currently require if it's going to be a three to four year program from the IMF? That's my first question.
And secondly, what type of details can you provide on any preliminary talks you've had with your – with your bond holders? What are your expectations for debt restructure? And what type of update can you provide on a – on a debt restructuring? Thank you.
MIN. JARESKO: Thank you very much. With regards to the first question, we're not discussing our financial needs for a three or four year program. We are really focused on the 12 to 15 months right now. And we haven't yet agreed on a final number. So really the numbers I can give you are the estimates that you've seen in the press, which is the IMF – the sources from the IMF have said an incremental 15 is their target. But right now we're in the process of defining that further. We have not had any discussions about three or four years. I think – I think it's just there are too many uncertainties to be able to look forward in terms of financial needs over three or four years. What reforms are necessary for three or four years, that we can do.
With regard to the second question, I announced when we requested the Extended Fund Facility that we intended to initiate consultations with our sovereign debtholders with regard to achieving medium-term debt sustainability. We have not started those consultations yet. We will start them after we've completed our negotiations with the IMF because the parameters of the situation will be clear once we've come to agreement. So I cannot tell you what type of consultations we'll have. What I can say is that, you know, we'll be listening to our creditors and all the stakeholders to ensure that we achieve that medium-term debt sustainability.
MR. KEMPE: Did that get to your question, Andrew?
Q: I think, yeah.
MR. KEMPE: Thank you.
Dina – I'm not sure if I'm pronouncing this correctly – Gusovsky of CNBC.
Q: Almost. (Laughs.) I just had a question about private equity firms that are focused on energy and natural resources in Ukraine. They're concerned that, basically, these new tax increases will sort of kill or defer Ukraine's chance to gain energy independence. I'm just wondering what you thoughts are on that? The tax currently stands at 55 percent for the natural gas extracted from deposits of up to five kilometers, and that's – and 20 percent of the natural gas extracted from deposits deeper than five kilometers.
MIN. JARESKO: Yeah, this is a continuation of the royalty scheme that we had, the royalty taxes that we had in place for the second half of last year. And we have committed publicly to look through and work with both industry and the IMF and others during the first half of this year to identify a royalty – a royalty scheme or a royalty set of – a set of royalties that would be both fiscally supportive and investment supportive.
That said, I think it's important to note that in terms of – by the end of December of 2014, we had already moved from being 100 percent dependent on Russian imported gas to having imported 33 percent of our gas from Russia and two-thirds of our gas from Europe. That doesn't – that doesn't answer the question about developing more of our own natural gas, but again, we are working and we have committed to, in the first half of this year, work through a new model of royalties that satisfies both those conditions, our fiscal needs and our desire to increase and attract investment in the sector. So it's an area that we recognize is not yet perfected, and we are doing – we're going to be staring some really heavy work, some focused work on improving it.
Q: Thank you so much.
MR. KEMPE: Thank you.
Anna Yukhananov from Reuters, please.
Q: Hi. Thanks for taking my question. Sorry I missed the beginning of the call, so I apologize if you already talked about this.
But just I was wondering if you could speak a bit about kind of the lower mid-level bureaucracy within Ukraine and what you find as far as kind of trying to change the culture? Because often that ends up being the most difficult as far as, you know, really changing a culture of corruption.
And then just a quick follow-up on the talks with bondholders. I understand that Lazard is managing some of those talks, and I was wondering if you could just confirm that. Thank you.
MIN. JARESKO: So with regard to your first question, I'll be honest with you that I have the pleasure and honor of being minister of probably one of the finest and most professional ministries in the government. I'm very proud of our ministry. It's also one of the smallest, given the tasks that we have. We have some 600 personnel, which is, again, one of the smallest ministries, given our responsibilities.
There's no question that it is a different environment than coming from business, where I came from just two months ago. So I'm used to much more of a results-oriented approach than perhaps the bureaucracy is, but I've also had some experience in other bureaucracies as you know from my biography, so I know that this is a problem globally. It's going to require, you know, a great deal of focus on the part of all of us in government to try and make our ministries more results-oriented; to establish those KPIs, or key performance indicators; to establish those job descriptions that make it clear; and to establish a sense of transparency and a sense of responsibility throughout the ministry. It's not something that's a short-term project; it's something that starts at the top and has to permeate. It's a longer-term challenge.
One thing that I've done already hopefully to try and start this change is I've invited in advisers from many of our G-7 partners to come in and work with me in particular areas. So I've had advisers from the Ministry of Finance of Canada helping me on the structure of my own team, making me a more efficient minister. I've had advisers from the Ministry of Finance of Germany coming to talk and work with us on the structure of our ministry in general, making sure that it's a European ministry and it's structured in a way to deliver European results, but also European service to our population. And then I have U.S. Treasury advisers in the area of debt management and I've invited Polish advisers to come work with us on the budget decentralization. And basically what I'm trying to do is marry, for every area and priority area of action and policy, outside advisers who can help me to ensure that we're focusing on the right issues, that we're bringing in new ideas from the outside, that we're not simply living in the past or living within our own bureaucracies. It's a challenge, but we're trying to meet it.
On the second question, we have not yet officially hired an adviser. We are in the process of doing so, and I hope we will – we will complete that process soon.
Q: Thank you.
MR. KEMPE: Thank you. And thank you, Minister Jaresko.
Warren Durrell (ph) of USA Today.
Q: Hi. Thanks a lot for taking my question, and I apologize if this was asked before, but I'm just joining the call a few minutes ago.
But, you know what, I'm trying to back up a little bit and understand how this reform process is impacted by – or if it's impacted at all by the fighting – the fighting in eastern Ukraine. I mean, how is that affecting the economy and Ukraine's ability to meet the IMF requirements and embark on this – on this process of the economic reform agenda?
MIN. JARESKO: Thank you for your question.
I'll be honest with you: From my perspective, the war makes reform all the more urgent and all the more necessary. There is only one way, in the end, for us to succeed as a sovereign state, and that is for us to have a successful market economy in a – in a global competitive environment.
And so I – the war has cost us a great deal. I said this earlier. It's cost us, most importantly, human lives – over 5,000 deaths as of today. It costs us in humanitarian – from a humanitarian perspective – we have over 650,000 internally displaced people. Some 1.7 (million) children have been affected by the war in the east, as well as the illegal annexation of Crimea.
It affects us from simply an economic standpoint. This was a very highly industrial part of the country. Industrial production is down 10 to 15 percent last year depending on the segment. It's 20 percent of the economy overall. And we've taken a very big hit, both from a financial standpoint, economic standpoint. I think the IMF and our partners understand that.
And we all hope, first and foremost, for peace. And we know and we recognize that peace is absolutely critical going forward. And so peace is – peace is number one. Implementing the Minsk Agreement in its primary areas of a cease-fire, closing – control over our borders, eliminating all foreign troops and equipment, and full exchange of all hostages is critical. Peace is critical.
But we – this war is on 7 percent of our territory; 93 percent of the Ukrainian geographic territory is, you know, up and operating and open for business. It is an economy that continues to function on – you know, on a very regular basis, although we are in a recession. And it is our – as I said, it's our responsibility, given the human – the human losses and the sacrifices made every day over the past year – more than a year – to the values of European civilization, to the values of freedom of media, freedom of assembly, freedom of religion, freedom of speech, to the values of sovereignty and territorial integrity, that we do these reforms now.
So war is not a reason or an excuse not to reform. In fact, it spurs us ever more so urgently to reform.
Q: So –
MR. KEMPE: You used – oh, sorry. Go ahead, please.
Q: Well, you say that peace is essential, but it's not – it's not happening. So does that – does that mean that – you know, at the same time you're saying that reform is essential and that war is not an excuse not to reform, but again – but the –
MIN. JARESKO: That's right.
Q: But the reform isn't – hasn't been proceeding, I guess, as fast as I think some people would like it – would like to see it. What's the relationship between the two?
MIN. JARESKO: I mean, other than the fact that it obviously takes a great deal of – I've described to you the relationship on the finance and the economy. But, you know, we have what we have as of today. We've been suffering through this war now not one month, not two. And we are reforming. You know, I agree it's not fast enough; it'll never be fast enough, and we should never agree that it's fast enough. So all of that I can't disagree with. But at the same time, we can reform, we are reforming and we have to reform. So, you know, I don't know how to put the pieces together any differently.
It means that our exports have been hurt. It means that our trade with Russia is down. It means that we need to diversify our markets. It means we need to diversify our exports. Our goals are clear. The requirements are clear. And in the absence of peace, it means that we have, as I described earlier, the need to financially mobilize and support and pay for and finance our national defense and law enforcement at a level that otherwise perhaps funds would go into something else. Today they must, as a priority, go into national security and law enforcement.
But that said, those are not excuses for not reforming. And no one in our government is using – or our president or our parliament – are using this as excuse to not reform. So, again, I argue that this makes it ever more important to accelerate and continue the process.
MR. KEMPE: Thank you. And thank you, Minister Jaresko.
And one question. You've mentioned the 20 percent of economy figure a couple of times. Can you elucidate what you mean by that? Is that a percentage of GDP that's being hit? Is it – just to describe a little bit more what that figure refers to.
MIN. JARESKO: It represents kind of almost an average. It represents, in some sectors, output has fallen 20 percent, primarily because of – for example, the machine-building industry. In other areas, 30 percent. Donbass region accounted in 2013 for some 15 percent of GDP, 25 percent of industrial output. Output's collapsed in those regions over 30 percent. So it's a number we use as taking an average of all the different elements of both industrial decline, our contribution to GDP, and it takes into account kind of our payments to the budget from those two oblasts; we're some 30 percent lower. So it's our average calculation of the general economic effect of all of these different elements.
MR. KEMPE: Thank you.
Now let me turn to Andrei Sitov of TASS news service.
Q: Thank you for taking my question, sir.
And I just wanted to come back to the issue of the sovereign creditors, whom you have not yet started consulting, as you indicated. But do you plan to start consulting with Russia, as with others? And I guess do you prioritize your creditors? Thank you, ma'am.
MIN. JARESKO: Thank you for the question.
Yes, we will consult with all our sovereign creditors, regardless of nationality. We won't be discriminating in any way with regard to nationality. There are a wide variety of nationalities that hold our sovereign credit. And no, we won't be making a priority of any particular group. We'll be – we'll be opening those consultations to everyone in a very transparent fashion.
MR. KEMPE: Thank you, Minister Jaresko.
And Toby Gati of Akin Gump.
Q: Thank you very much.
You've described a very steady process of reform. And my question to you is, what about unexpected events? For example, I know much of your money goes to pay Russian bills. What if the Russians precipitated a default? What would be the repercussions for Ukraine or for Europe? And can you talk a little bit about what the complication is, especially maybe for your interaction with the Germans for the change in Greece and the need in Greece for basically a bailout package?
MR. KEMPE: Thank you, Toby.
And, Minister Jaresko, since we've had this question from Andrei Sitov and from Toby, you know, maybe go a little bit deeper into the situation in terms of the Russian creditors. What is their – what are the issues involved there?
MIN. JARESKO: We're current on all of our obligations, and so there's no issue from my perspective and there's no issue that's been described to us in any formal way from any of our creditors, including Russia.
Let me just clarify that we're talking about a $3 billion Eurobond that was issued in December 2013, at the very end of the Yanukovych regime. It's a Eurobond, which means it's tradable, which means at any given time it could be in the hands of anyone. We understand it could be in the hands of a Russian sovereign entity. But again, all of that will become clear when we enter into consultations.
You know, I don't want to talk about the situation that you described. We're doing everything possible to maintain our creditworthiness and to meet the obligations that we have, and I guess that's – that's our goal. Other scenarios are not, frankly speaking, worthy of discussion at this point. With regard – and that's why we're in these talks, again, with the IMF, that's why we're developing this financial support package, so that we can meet the needs of all of our stakeholders and the country, and move to a sustainable level of debt and a(n) economic health that will be beneficial for all of our creditors as well as our other financial partners.
The second part of the question – remind me again, the second part of the – oh, Germany and –
MR. KEMPE: Toby?
Q: – and Greece.
MIN. JARESKO: Germany and Greece, all right.
We have a very supportive relationship with Germany, and Germany's been very supportive within the EU and bilaterally. The Greek question is something that we saw a great deal of – (audio break) – government was put in place. But that said, it looks to have, to some extent, calmed down. We're hopeful that, most importantly, that the European Union will stay absolutely united in terms of the sanctions and the continuation of sanctions until such time as the Minsk Agreement is fully implemented.
In terms of comparing Greece to Ukraine on the financial side, it's really – really is very far from – the two situations are very, very different, very far from one another. The Greek – the Greek problem is, financially, much, much larger, and on a per capita basis is, you know, nowhere near what's going on in Ukraine. Ukraine is a much more manageable situation, financially.
Two, in Greece today you have a variety of opinions with regard to the willingness to reform, the willingness to participate in IMF programs. Here you have the exact opposite: an absolute commitment on the part of, again, a constitutional majority in the parliament, a government chosen by that constitutional majority, the president and the Cabinet ministers to reform, to work cooperatively with the IMF and with our financial partners on a financial package.
I think the other part of this that I can't not mention is that it's important to stress the difference that Ukraine finds itself in this situation to a great extent because of a war that was not of its own making, and it's not simply an issue of mismanagement – of previous mismanagement or debt management. It's a combination of the war, the previous regime – which took on some $40 billion of debt during its period in office – and, you know, in combination with, perhaps – not perhaps – in combination with the lack of or slowness of reforms over the past 23 years.
MR. KEMPE: Thank you very much.
Roger Myerson from the University of Chicago.
Q: Yes, I'd like to ask something about reform and budget decentralization. In the past, budgets of municipalities, raions – the counties – and oblasts – provinces – have depended in scale on national appropriations. We understand that anywhere in Ukraine a popularly elected mayor who wants to take some public action against corruption that affects his constituents has to worry that, if the corrupt officials have national political connections, that he may simply end up costing himself his budget. What will budget reform do to help give municipalities, raions and oblasts some clear autonomous control of a clear local budget that's independent of politics from Kiev?
MIN. JARESKO: Well, I'm not sure I understood fully the question about the local official. What I can tell you is we've provided the local authorities with a lot more authority to tax independently. There are – there are complete categories of tax that they decide whether or not they wish to implement them and at what level. So, for example, property taxes, for example the excise duty, the retail excise duty. There is not only those individual taxes, but they're getting a larger portion of the general taxes in several cases, from the general fund. The total resource that's being provided to the local budgets in addition, from a tax perspective, is about 25 billion hryvnia, which is over a billion dollars.
Aside from that, in this decentralization, there is a process of – what would we call it in English? – a leveling out. In other words, regions that may be for some reason economically more poor off or poor and aren't able to meet standards averages in the nation will be provided some transfer from the regions that are overperforming. However, there's an incentive system such that we're not taking away everything in the overperformance and we're not subsidizing or transferring all of the underperformance, in each case, to give incentive to continue to overperform or to get out of the underperformance.
This is supposed to, in theory but also in practice, bring local government closer to its population, make better decisions with regard to how to implement taxes. So, for example, on property taxes, there's a range, and if they decide that for a particular category or particular district that might be harder hit, if they want to reduce the tax, that's their choice. They're closer to the people. They now have the authority and then the responsibility. They also now have the responsibilities to decide whether they'd like to put their revenues into roads or hospitals or schools or a little bit into each. Again, our hope is that this is something that helps them, especially prior to local elections, which is coming up towards the end of this year, to show that they are closer to their voters and closer to their local populations.
In terms of Kiev's role, I guess all I can say is that in the past, we had a trickle-down budget where everyone came to Kiev begging, and that whole – that whole process will be over now.
MR. KEMPE: Thank you. Thank you, Minister Jaresko.
And we're down to the last couple of minutes, and let me – and we've got two questions in the queue; maybe I can turn to each of them, one after another, to – and put their question very briefly. So first of all, if we could turn to Tymofiy Mylovanov of Vox Ukraine and then after that Jamila Trindle of Foreign Policy magazine. Tymofiy.
Q: Hello. Thank you very much for taking my question.
Minister Jaresko, you commented on the difficulties or the importance of judicial reform. My understanding – and correct if I am mistaken – there are multiple proposals in Ukraine and they differ in the amount of the independence that the judges will have. What is the balance that the government and the politicians are trying to strike in terms of rooting out the corruption from the judges while maintaining or promoting some political independence of the judiciary? Thank you.
MR. KEMPE: Thank you. And, Minister Jaresko, just in respect to your time, let's pick up the second question and then you can judge what time you have to answer them.
Jamila Trindle of Foreign Policy magazine, please.
Q: Thanks. I just wanted to ask a question about VAT reform because I came in on the middle of that. And how – the question is how much you're expecting it to change the amount of tax collected overall and how much of a boost to that to the – to the treasury's coffers is that going to be. Thanks.
MIN. JARESKO: So the second question, we didn't actually budget for a major increase in VAT collections. In many areas in the budget, we were very conservative in projecting how things would change in terms of eliminating fraud or increasing movement from the shadow economy to the formal economy because we don't have any trend lines from which to do the forecasts. So we didn't – we didn't actually forecast much of an increase, so that's not a budgetary or fiscal issue that we focused on. Hopefully it will have a much bigger effect than what we – what we budgeted for.
With regard to judicial reform, quickly, that's not an area of my expertise. I know there are two different pieces of legislation and that they're working on bringing them together and working, again, with all of our international partners and the Venice Commission to try and come to some reasonable compromise, but I don't know the ins and outs of that issue. I'm sorry.
MR. KEMPE: Thank you, Minister Jaresko.
Let me just close. And I think I speak for everyone on the line that this was just an enormously useful hour. I can't imagine a better person to walk us through the intricacies of these financial and economic challenges and the responses by you, and then – and then hopefully with the support of the international financial community and the IMF. We realize the pressures you're under. You've got to fly the airplane not only as you're repairing it, but really as it's under attack also from below, and it's quite a great set of challenges. We wish you the best in this effort, and thank you so much for taking the time with us. I hope we can revisit this conversation, you know, a little bit down the road and as we – as we update your situation. So thank you very, very much, Minister Jaresko.
MIN. JARESKO: Thank you for the opportunity, and thank you all for your support and interest in Ukraine. We appreciate it greatly.
MR. KEMPE: Great. And we expect that this will all be posted and up online for us by 5 p.m. today and I believe also with the transcript. So thank you very much. All right, bye bye.